Sales Tax Holidays Aren’t Good for Texas

Last week I presented invited testimony to the Senate Finance Committee about sales tax holidays. Sales tax holidays sound good to consumers, especially in the late summer right before school starts. With a list of school-year needs a mile long, from school supplies to new clothes, hard-working Texas families look for every opportunity to save money. But sales tax holidays have unintended negative consequences, even for the consumers who think they’re getting a great deal.

I grew up in Carrollton, where my parents still live in the same house. When I was growing up, my dad drove a minivan older than me. My mom is a teacher and her livelihood depends on state and local public investments. Growing up, I wanted to be the coolest kid in school, and I suspect most children want to be, too. But my mother was very frugal. She primarily bought clothes on sale, and we would always go shopping on tax-free weekend. Little did we know that had we shopped the week before, we would have paid taxes to help fund the services we use every day and likely would have saved more and gotten a better deal.

That last point might surprise you, but it’s been documented by the Tax Foundation as part of its research showing that sales tax holidays don’t create economic growth. Rather than encouraging consumers to spend more, these holidays simply shift the timing of purchases families already planned to make. To offset sluggish sales in the weeks before and after the holiday, some retailers raise prices during tax-free weekends or reduce prices on the surrounding weekends. As a result, consumers get a worse deal, paying more for the same items during a tax holiday than they would any other day of the year.

Some supporters of sales tax holidays argue that they benefit low and moderate-income Texas families the most. But lower-income consumers are least able to time purchases to coincide with tax-free weekends. Rather, tax holidays provide the biggest benefit to families with the most money to spend, including out-of-state shoppers. Families living paycheck to paycheck do not have the luxury of timing their purchases to take advantage of a tax break.

Source: Legislative Budget Board, March 2016

I also told Senate Finance members about how the revenue foregone by sales tax holidays limits the state’s ability to provide necessary services. For example, the need for autism services is much greater than what the state currently addresses, and revenue lost over tax-free weekends could expand those services for Texas families. Should sales tax holidays be a priority over providing autism services that would help thousands more children lead more independent and successful lives?

As part of my testimony, I recommended to Senate Finance members that sales tax holidays should be conditional on adequate revenue growth. For example: a holiday would be held only if the Comptroller certified that state sales tax collections were expected to increase faster than Texas’s population and inflation in a given year, based on the most recent revenue and economic outlook for that state fiscal year.

Sales tax holidays sound good in theory, but in reality are not worth it. I want to see our state cultivate a robust 21st century economy that adapts to the needs of our times. I want to see that my fellow Texans are able to prosper and meet all financial obligations for raising a family in this great state. Sales tax holidays limit our state’s ability to invest in the programs and services that all Texans need to be able to compete and succeed in life; conditional tax-free weekends would be a more fiscally responsible approach.

At the Center for Public Policy Priorities, we believe in a Texas that offers everyone the chance to compete and succeed in life. We envision a Texas where everyone is healthy, well-educated, and financially secure. We want the best Texas - a proud state that sets the bar nationally by expanding opportunity for all.
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